In the current economic climate, charities need to think strategically about their resources and managing associated risk.
These issues were brought into focus by the difficulties faced recently by the healthcare charity St Luke's Hospital for the Clergy. The charity was forced to sell its central London hospital in 2009 to repay about £3.5m in bank loans and £600,000 borrowed from trustees. It also had to return more than £750,000 in donations that were intended for the hospital.
Although the property sale raised £7.25m, less than a third of this sum will actually be available to the reinvented charity.
To some extent, the trustees might have been victims of circumstance. But they do appear to have suffered from relying on past success. They seem to have assumed that a strong asset base was sufficient, and failed to review the charity's structure, assets and practice in the light of the changing economic climate. They were also forced by ever more stringent care standards into modernising the hospital premises, and when a fundraising appeal fell short of its targets and the refurbishment took longer than expected, resources were stretched to breaking point. Hopes were also dashed that the number of consultants using the refurbished hospital for private patients would increase.
It is easy to say, with hindsight, that the trustees should have sold the property sooner rather than persevered with the refurbishment plans. But the big question is this: what lessons can be learned by other charity trustees who might find themselves in a similar position?
St Luke's was operating as an unincorporated association, governed by a constitution dating back to the early 20th century. Unincorporated status gives a charity no separate existence in the eyes of the law, making its trustees personally liable for debts accrued.
Given that the charity owned a substantial property, employed a significant number of staff and engaged with the public in a notoriously litigious arena, it is surprising that the charity continued to operate in this way. Its chair has noted: "We learned that limited liability would have been advisable."
The trustees might well have felt safe because of the charity's long history, but even substantial assets can quickly disappear, particularly if those assets are in property and the market collapses. Had the St Luke's trustees not been able to agree a lease to a private healthcare company, the freehold sale might have yielded much less and the trustees could have lost some or all of the money they were forced to lend to keep the charity afloat.
Trustees of all unincorporated charities should consider carefully whether their structure remains appropriate to their current activities, or whether they need the additional protection afforded by a corporate structure.
The second issue is whether the trustees of St Luke's were sufficiently active in considering diversification of the charity's activities. It seems the charity was operating at a loss for many years. New activities to generate income should perhaps have been considered much earlier. Failing that, earlier consideration should have been given to closing the hospital and using the proceeds in the other ways that are now being considered.
Trustees have a responsibility to review their charity's performance in its particular marketplace. Is it competing effectively, or do changes need to be made for it to remain financially viable? They must also be ready to respond to the new opportunities and challenges that arise as a result of changing social circumstances. An unwillingness to change or a failure to recognise the need to do so may prove to be fatal.
Trustees of all charities must therefore give sufficient attention to their activities and the need to move with the times.